2021 (7) TMI 39 - AT - Income Tax

Treatment of royalty payment as capital expenditure - disallowance made on license fee by holding it to be capital expenditure - HELD THAT - Before us, Revenue has not placed any material on record to demonstrate that the orders of Tribunal in assessee's own case in earlier years in A.Y. 2001-02 2002-03 has been set aside/overruled or stayed by higher judicial forum. In such a situation, we are of the view that the AO was not justified in disallowing the payment of license fees on ad hoc basis by holding it to be capital expenditure. We therefore direct the deletion of the addition made by AO. Thus the ground No. 1 of the assessee are allowed. Disallowance u/s. 14A r.w.r.8D - HELD THAT - It is an undisputed fact that year under consideration is 2006-07 and the AO has proceeded to disallow the expenses by following the methodology prescribed under Rule 8D of the I.T. Rules. We find that provision of Rule 8D for invoking the disallowance under Rule 14A could not be applied to the year under consideration in view of the decision in the case of Godrej Boyce Mfg Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein has held that since Rule 8D were notified on 24th March 2008, it would apply from A.Y. 2008-09. Following the aforesaid decision of Hon'ble Bombay High Court, we are of the view that no addition is called for in the present case. We therefore set aside the addition made by the AO thus the ground of the assessee is allowed. Disallowance of transportation is made for the reason that the transpiration was for the transportation of machinery and therefore required capitalization - HELD THAT - We find that the disallowance has been made by AO on ad hoc basis without bringing any material on record to support his views. In such a situation, we are of the view that the addition made by AO was not justified. We therefore direct its deletion. Thus the ground of assessee is allowed. Depreciation of printers @ 60% - depreciation on computer accessories and peripherals - HELD THAT - It is the claim of assessee that it being an integral part of computer system, depreciation @60% is allowable. On the other hand, it is the case of Revenue that it is eligible for depreciation @ 15% being the rate applicable to general plant and machinery. In the case of CIT vs. BSES Yamuna Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT has held that computer accessories and peripherals such as printers, scanners and servers form an integral part of the computer system and they cannot be used without the computer and therefore they are part of computer system and therefore eligible for depreciation @ 60%. Revenue has not placed any contrary binding decision in its support. We therefore following the aforesaid decision rendered by Hon'ble Delhi High Court in the case of BSES Yamuna (supra) hold that AO was not justified in restricting the depreciation @ 15%. We therefore set aside the order of AO on this issue. Thus the ground of assessee is allowed.

Issues Involved:

1. Treatment of royalty payment as capital expenditure.
2. Disallowance under Section 14A of the Income Tax Act.
3. Addition pertaining to royalty payment in respect of international transactions.
4. Ad hoc disallowance of transportation expenses.
5. Denial of depreciation on computer peripherals and accessories at the rate of 60%.

Issue-wise Detailed Analysis:

1. Treatment of Royalty Payment as Capital Expenditure:

The Assessee paid royalty to Roulunds Fabriker, Denmark, which was debited to the Profit and Loss account and claimed as expenditure. The AO treated 25% of the royalty payment as capital expenditure, citing that the know-how provided an enduring advantage. However, the Tribunal found that similar disallowances in earlier years were overturned by higher judicial forums, including the High Court. The Tribunal concluded that the royalty payment was not for acquiring any asset of enduring nature but was for the right to use the know-how, thus allowing it as a revenue deduction. Consequently, the disallowance made by the AO was directed to be deleted.

2. Disallowance under Section 14A of the Income Tax Act:

The AO made a disallowance under Section 14A by applying Rule 8D, which was upheld by the DRP. The Assessee argued that Rule 8D was not applicable for the assessment year 2006-07, as it was notified on 24th March 2008 and applicable from A.Y. 2008-09 onwards. The Tribunal agreed with the Assessee, referencing the Bombay High Court decision in Godrej & Boyce Mfg Co. Ltd. vs. DCIT, which held that Rule 8D applies prospectively from A.Y. 2008-09. Therefore, the addition made by the AO was set aside.

3. Addition Pertaining to Royalty Payment in Respect of International Transactions:

The TPO treated the royalty payment to Roulunds Fabriker, Denmark, as not being at arm's length, considering it a price reduction for products sold to AEs. The Tribunal noted that similar issues in earlier years were remitted back to the AO following the High Court's decision in Cushman & Wakefield, which held that the TPO's role is limited to determining the ALP, while the AO decides the deductibility under Section 37(1). Following this precedent, the Tribunal remitted the matter back to the AO/TPO for fresh consideration, directing the deletion of the addition.

4. Ad Hoc Disallowance of Transportation Expenses:

The AO made an ad hoc disallowance of transportation expenses, treating them as capital expenditure related to the transportation of machinery. The Assessee contended that all such expenses were already capitalized. The Tribunal found that the AO's disallowance was made on an ad hoc basis without supporting evidence. Consequently, the Tribunal directed the deletion of the addition.

5. Denial of Depreciation on Computer Peripherals and Accessories at the Rate of 60%:

The AO restricted depreciation on computer peripherals and accessories to 15%, treating them as general plant and machinery. The Assessee argued that these items are integral parts of the computer system and should be eligible for 60% depreciation. The Tribunal referenced the Delhi High Court's decision in CIT vs. BSES Yamuna Power Ltd., which held that computer peripherals and accessories are part of the computer system and eligible for 60% depreciation. Therefore, the Tribunal set aside the AO's order and allowed the higher depreciation rate.

Conclusion:

The Tribunal allowed the appeals of the Assessee for both assessment years, directing the deletion of the disallowances and additions made by the AO. The judgment emphasized consistency with earlier judicial decisions and proper application of legal principles.

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